The asset bubble theory of income inequality
There's been a debate going on for a few years about whether the big rise in income inequality in the U.S. over the past three decades has been at least partly a political phenomenon or purely an economic one. The first camp, whose members include political scientist Larry Bartels and economists Thomas Piketty and Emmanuel Saez (pdf), argues that decisions about taxing and government spending made since the early 1980s have increased the disparity of incomes. The second, which consists of the vast majority of economists who study such things (although more have been drifting toward the Bartels-Piketty-Saez camp in recent years), contends that globalization and technological advance have increased the rewards to the most skilled and reduced pay for those whose work can be done by machines or lower-paid workers overseas. Since globalization and technological advance are good things, the increase in inequality thus isn't really something we'd want to stop.
Well now, after looking at the data about the country's 400 highest earners and reading the comments by pneogy and shepherdwong, I am ready to offer an important new theory (well, not entirely new): The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Whenever the market (be it the market in stocks, junk bonds, real estate, whatever) booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble. It's not the same people raking it in every time—there's lots of turnover in the top 400—but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades.
These asset bubbles weren't pure bubbles. Prices always began rising for some real economic reason, then got out of hand. So in this accounting, the rise in income inequality would be partly based on economic fundamentals, partly on financial market excess. Which brings to mind UCLA finance professor Richard Roll's famous (among the cognoscenti, which you will join if you read The Myth of the Rational Market, which goes on sale June 9) 1987 presidential address to the American Finance Association (pdf). Roll looked at stock market movements from 1982 to 1987 and tried to account for them using economic data, industry data and company-specific news. Those factors explained less than 40% of the movements, leading Roll to surmise that either there was lots of private data out there moving markets that he hadn't been able to get his hands on, or many stock market fluctuations were irrational. "It would be nice," he wrote, "to have a method for detecting the difference."
-
1
Justin,
I am glad that you and Mark Thoma have sifted through data and concluded that asset bubbles are associated with high income inequality. I came to the same conclusion by convincing myself that the process of diverting national resources from vital societal needs such as improvements in health care, infrastructure, energy production, deficit reduction, etc. to frivolous activities could not be sustained indefinitely. -
2
...contends that globalization and technological advance have increased the rewards to the most skilled and reduced pay for those whose work can be done by machines or lower-paid workers overseas. Since globalization and technological advance are good things, the increase in inequality thus isn't really something we'd want to stop.
_
uh, do you understand what you're writing?
_
There is a difference between noting that the economic benefits of the efficiencies achieved by "globalization" and "robotization" (which is really what you're talking when you say "technological advances") wind up in the pockets of the wealthy, and assuming that the status quo is the only way to distribute those economic benefits.
_
The fact is that globalization and robotization have proven disasterous for the vast majority of the world's population precisely because of the concentration of wealth that has resulted. Globalization allows a small percentage of workers in poor countries to realize some minimal economic gains from export based economies, but those gains gets wiped out as soon as the export economy goes south --- creating massive concentrations of poverty in cities throughout the developing world.
_ -
3
@plukasiak: ... globalization and robotization have proven disasterous for the vast majority of the world's population ...
-
Got any evidence to back that up? I was under the impression that by most standards--from purely economic measures to things like health outcomes--living standards have risen over the past half century (a time of rampant globalization and robotization) for most of the world's population. Check out, for example, http://www.gapminder.org/ -
4
actually, your own link shows that most of the gains throughout the non-industrialized world were made between 1945 and 1980 -- globalization (as an economic construct) didn't take hold until the mid-eighties/early nineties, and really took off with the creation of the WTO in 1995. (and much the same can be said for robotics)
_
moreover, we're just beginning to see the downside of globalization's impact -- what happens when economic growth in developing countries is based primarily on fulfilling external demand, rather than the creation of sustainable markets within those nations, when demand for exports falls in the "developed" world. -
5
Hmmm, as someone who has spent the last 20 years working on technological advance, I believe I can attest that robotization (and its connotations that you seem to apply) is an extremely small part of that process.
-
However, I fully agree that many developing (and some highly developed) economies have designed their growing economies around export, and that is pretty unsustainable over the long term. -
6
I would have to agree that robotization is merely a small part of the process as a whole. Robotics are still in the very early phases and we have yet to even crack the ice on the advancements that will be seen in coming years.
Jesdon
real estate license -
7
I agree that The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Read more about theory of persistent income inequality.
Sean
- foxjust @MichaelWolffNYC Come on, it's the 'Burn Rate' of post-traumatic stress disorder thrillers! - 2 hours ago
- foxjust An acronym we can believe in RT @moorehn RT @shannybasar DOLTS, Dangerously Over-Leveraged Triple-A Superpowers http://bit.ly/bJq48M - 3 hours ago
- foxjust My first UK book interview (at Fool.co.uk). Complete with bestest, most gushingest intro ever http://bit.ly/aJaW2c - 4 hours ago
Most Popular »
- Undercover Boss Is Phony and Manipulative. But Don't Hold That Against It.
- NH Poll: Dems Face A Thumpin'
- Love At First Byte: Your Nerdy Valentine's Day Guide
- Today's Health Care Checkup - GOP Plans Under the Spotlight
- Jack Murtha, 77, Dies
- CO Gov Poll: Hickenlooper +4
- OH Gov Poll: Kasich Maintains Lead
- Paul Ryan Won't Run For Prez In 2012
- Google Looks To Crush Facebook, Twitter With a More Sociable Gmail
- White House Health Care Meeting Met With Skepticism On The Hill
- Tea-Party Convention: Lessons on Palin and the Movement
- Al-Qaeda, Yemen, Wedding: Unlucky Name, Celebration
- Venezuela's Opposition Protests Slur Chavez at Ball Game
- Is the Bible Fact or Fiction? Archaeology's Discoveries
- Why China Needs The U.S. -- And Vice Versa
- Foreign Fish Species Threaten Great Lakes Ecosystem
- 'Black Hearts': On Green, Iraq's 'Triangle of Death'
- Israel vs. Hizballah: Drumbeats of War
- Marja: Operation Moshtarak Tests Obama's Afghan War Plan
- From Comcast to Xfinity: Does Name Change Conjure Porn?
Quotes of the Day »
RSS